Beyond Diversity: A Tale of Faultlines and Frictions in the Board of Directors

Mathijs van Peteghem, Liesbeth Bruynseels, Ann Gaeremynck

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Various regulatory governance initiatives have strived for board diversity, as diversity stimulates creativity, encourages discussion, and enlarges the board's knowledge base. However, increased diversity results in superior decision-making only when the board is free from conflicts and acts as a cohesive group. In this paper, we extend existing corporate governance research by introducing faultline theory to the board of directors (Lau and Murnighan 1998). The idea is to show how a board's diversity structure can give rise to the formation of subgroups along faultlines. The resulting subgroup formation may, in turn, reduce board effectiveness. Using a sample of U.S.-listed firms between 2008 and 2012, results suggest that boards with strong faultlines are associated with lower firm performance, lower CEO turnover-performance sensitivity, and higher abnormal CEO compensation. Understanding potential unintended consequences of board diversity could be of interest to regulators and companies that plan to appoint new directors to the board.

Original languageEnglish
Pages (from-to)339-367
Number of pages29
JournalAccounting Review
Volume93
Issue number2
Early online date2017
DOIs
Publication statusPublished - Mar 2018

Keywords

  • group dynamics
  • faultlines
  • board of directors
  • corporate governance
  • board performance
  • CORPORATE GOVERNANCE RESEARCH
  • CEO TURNOVER
  • FIRM PERFORMANCE
  • AUDIT COMMITTEE
  • DEMOGRAPHIC FAULTLINES
  • RISK-TAKING
  • ORGANIZATIONAL GROUPS
  • COMPANY PERFORMANCE
  • FINANCIAL EXPERTISE
  • EMPIRICAL-ANALYSIS

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